Investigating the Relationship between Inflation and Exchange Rate Jumps by Considering the Index of the Central Bank's Intervention Degree and Using the Dornbush launch Model

The present study examines the relationship between inflation and exchange rate jumps, taking into account the index of the central bank's intervention degree and using Dornbush launch model and using Star's soft logistic transfer model (LSTR) for the period from 1986 to 2020. The estimation results of the linear part of the model (the first regime) and the nonlinear part of the model (the second regime) show that the variables of oil price, exchange rate jump, degree of central bank intervention and money volume have a positive relationship with inflation in Iran's economy, which with the transition from the linear regime Non-linearly, the speed of transmission and the effect of variables have increased. So that for one unit increase in oil price and exchange rate jump, the inflation rate has increased by 5 units and 21 units respectively. In other words, the increase in oil revenues has led to an increase in inflation in the country. Also, the value of the estimated threshold limit for the variable of currency jump transmission was equal to 0.13. By comparing the coefficients of the model in two different regimes, it can be seen that when the growth of the exchange rate exceeds the threshold (0.13), the reaction of the monetary authorities to the changes of this variable has greatly increased, so that the higher the growth of the exchange rate, Policymakers have tried to control the growth of the exchange rate and prevent its increase by reacting more to it. Also, the average amount of central bank intervention shows that the central bank intervention policy has not played an effective role in neutralizing the pressure of the currency market. The reason for this is that in Iran's single-product economy; it is the main supplier of government currency. The central bank is also responsible for financing the government budget. Therefore, foreign exchange intervention in the market is mainly done in order to provide Rial resources to the government budget.